you can't sit and dwell on what isn't. >> we wish you good luck with this book. >> thanks for coming to see us. or tom--rory bw >> tomorrow -- barry manilow! >> barry manilow's in the house. >> plus the competition begins on "today's i'm jim cramer and welcome to my world. you need to get in the game. firms are going to go out of business, and he is nuts! they're nuts! they know nothing. i always like to say there is a bull market somewhere. i promise to find it just for you. "mad money," you can't afford to miss it. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends. i'm just trying to make a little money. it's noty job just to entertain, but i'm doing some teaching tonight. so call me at 1-800-743-cnbc. earnings season. earnings season. i dread earnings season. why? because it is overwhelming with so many companies reporting at once and so much data being thrown at you. because it's hard to keep track of the expectations and to really know what is better than expected, what the whisper, the real benchmark that must be beaten is. nah, uh-huh.
it's because i have a really bad back. i can't stand carrying the printed out versions of the conference calls as i schlep from downtown manhattan to my studio here where i do "mad money" in englewood cliffs. i got to help you this earnings season. i want to offer you a new way to use earnings season to put it in perspective. because most of you who watch this show are not the day traders that really hijack a lot of the thinking. you're not trying to gain a quarter. because it becomes so difficult to predict, and often the initial moves aren't even accurate because of the press coverage, or because something is nasty in the overall market, because of europe or something involved in the election. in other words, other than for those who are shorting or going long stocks ahead of the quarter, these earnings reports need a context to make you money. they can't be relied upon anymore because they aren't as predictive of future behavior as they once were. they are a piece of the puzzle, a part of the mosaic.
but they're only one of many important parts of what predicts where a stock will go over the intermediate term. that tends to be the focus that i teach about on the show. and it is a teaching show, because i want you to know the metrics i'm using to pick stocks i talk about and recommend here, and with my charitable trust, which you can follow along. i want to teach you how to listen to the conference calls, at least give you my opinion of what matters on the calls and how i let them factor into my thinking of picking stocks. i'm hoping this show will once and for all -- because this is what i see on jim cramer constantly -- tell you how to evaluate your portfolio, figure out what you need to trim, what you need more of. let it hone your way of thinking -- not mine, but yours. earnings season is incredibly important, what it tells you about a host of issues, four times a year, big report cards. not just the trajectory of the estimates. we're going to flush all that out. i'm so tired of the estimates of a penny or two. that's not making anybody any money.
look, we can't dismiss earnings season. that would be totally wrong. we just got to put it in context. here is how i use these reports that we constantly refer to. first, i assess them for their predictive value for the year. to do that, try to discern where analysts go with their estimates after the companies report. do they raise them? do they lower them? do they keep them the same? let's say apple issues a report that is not only better than the posted numbers that you can find on a lot of websites, but also beats what is called the high man. some call it the whisper. i think that's wrong. the analyst high estimates on the street that will always cause a raising of numbers for the rest of the year by everyone. or if it is the end of the year for the numbers and the year after it. i use that increase in earnings per share, the ones that they bump it, okay, to figure out several things. first, try to figure out if the increase is from real business, okay? actual sales. do they do better? and not just accounting changes and share count changes. the latter fools a lot of people.
to do what i like to do, i look more at the revenues than the actual earnings themselves. why is that important? because the company can't change the sales line except increasing demand, producing more, gaining more customers, either at the expense of others, through better salesmanship and acquisition. they're making a better job. they're working harder. they're working it better. but a company can easily change the earnings by buying back a ton of stock. not the sales line, but the earnings. simply changes the denominator, the number of shares. keeping the numerator static. the holy grail, accelerated revenue growth, argh! quarter over quarter and year over year drive my thinking. they allow me to figure out revenue. that allows me to figure out what to pay for the stock in the future. lots of people examine the price-to-earnings multiple of the stock and make a determination of the stock's worth in what i called the p/e vacuum, the price-to-earnings multiple a vacuum and sell at 20 to 30 times when the stock sells
11. they say oh, that's too expensive. it sells more than the average stock. lazy thinking. you need to use the prism i just laid out for you. figure out how fast the company is growing, link quarter, the previous one and the current one and the year-over-year quarter. and calculate that trajectory versus growth rate. if a company growth is 20% and the per earning per share is 20 or less, hey, you know what? you probably have a big bargain on your hands. we call that using the p.e.g. ratio. again, fundament of this show. the price to earnings to growth ratio, a much more important ratio than the price to earnings multiple because it puts the multiple into context you can use. i'm willing to pay up to maybe twice the growth rate of the company, especially if there is very few companies growing that fast. meaning there is a scarcity of value of fast growing companies.
a 70 times earnings for a company that is growing at 40% begins to get me nervous. even 40% growth is very hard to come by. that's nosebleed territory, and there are too many things that can go wrong with a stock when that happens. the converse is true too. when i see a stock that sells for less than one times its earnings per share growth, i begin to salivate, because unless there are other factors going against it, the factors that we'll cover in the rest of this special show, i'm drawn enough to the stock that i have to find other reasons not to buy it. so the bottom line, i use the actual earnings per share reports to figure out the growth rates of the stock, and if the growth rate is high and the price-to-earnings multiple based on the future projections is equal to or less than twice the growth rate, then i'm interested enough to proceed with the rest of the work that this special show will detail. i need to go to brad in south carolina. brad? >> caller: hey, jim, i want to give you a big ron paul boo-yah to you. >> wow, okay. that's aggressive. i'll take that.
go ahead. >> caller: hey, jim, i'm wondering how to best prepare for this earnings season in terms of online resources. i'm interested in what your browser looks like as you stay on top of the of all the updates. >> okay, what i like to do -- first of all, i watch cnbc. i'm not kidding. cnbc covers the earnings season better than anyone. i actually go to the websites. the websites now are so, so good that literally they will have the analyst reports. they will have a lot of the projections. then i like to look at the news stories to get a sense about what the consensus is. and then i look at the analyst reports the day after. and all that has to be done if you're going to really sink your teeth in and feel very confident. start with the website of the stock. let's go to daryl in california, please. daryl? >> caller: yes, boo-yah, jim cramer. >> boo-yah! >> caller: i have a question there. what is meant by a reverse split stock? >> that means if there is a million shares, let's say they do a three to one, make it
300,000 shares. citigroup did one of these, okay. what it does if you have like 300 billion shares, you divide it by three. you get 100 billion. it does raise the price, but it's a loser. you just have fewer shares. tyler in florida, please. tyler? >> caller: hey, jim, i'm going to give you a south florida boo-yah. >> oh, i'll take that. i need to go there now. always. what is up? >> caller: hey, the sun is shining -- no, it's not. it's overcast. hey, quick question for you. when you talk about the economy, you know, really booting off again, it seems like you talk about it in terms of consuming and not producing. and i'm thinking, you know, from the way i think about it, you need something to be produced before it's consumed. so i'm wondering why in terms of a growing economy you talk about consumption instead of production. that is what it seems like to me. >> well, i do because in order to be able to raise price, you need demand. if there is a shortage of supply, sure, that can mean something. but not if there is no demand, right? if you have a shortage of a
supply of some product that nobody likes, you can't raise price. it doesn't mean anything. a company has got to earn its stars before you buy it. okay. use the eps to figure out a company's growth rate, and then take it from there. "mad money" will be right back. build your future -- >> happy boo-yah to you. thank you for not just the money, jim, but what the money translates into. in my case, a college education for my son. >> boo-yah! thanks a lot for your passion for stocks. "mad money" does work for the small investor like me. >> "mad money," you're making me money for college. jim boo-yah, i love you. >> how many other shows have kids calling in and saying "boo-yah?" >> one boo-yah at a time. "mad money" with jim cramer, week nights 6:00 and 11:00 p.m. eastern, only on cnbc. miss out on some "mad money"? get your "mad money" text alert today. text "mm" to 26221 to get cramer right on your phone.
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how not to be overwhelmed by earnings reports, and to put them into perspective so you can profit from them in an informed and confident way, make money at home. we just went over how i like to use the earnings reports themselves to figure out the growth rate, then relate it to the stock price to figure out if it's too expensive or too cheap against its sector and the rest of the market. the next way i use the earnings report, though, is equally important in some ways because of what i call the etf-ization of the market. even more important than the growth rate of the stock. i measure the earnings growth and the quality of earnings growth against its cohort, and then i figure out, here it is, whether the whole cohort is worth owning. for most of my three decades of investing, i have accepted the sector is important when you're picking a stock, right? it matters. historically, a sector has counted maybe as much as 50% of the stock's performance. but now because so many people trade through ets and they have become so popular for individuals and more importantly
for hedge funds to make decisions about stocks, take quick action, the sector has superseded earnings at times. i got to tell you, often it's made earnings all but an after thought for individual companies. take the way the banks have traded in the past couple of years. it doesn't matter whether a bank did a good job or a bad job? the financial etf encompasses many jobs, and people didn't want to know, it didn't matter how well the bank did. domestic banks with little exposure to weakened europe and strong managements translated into jpmorgan and morgan stanley. that's why at times i've had to dismiss the earnings per share gains entirely at the moment if the cohort was radically out of favor. but i never just forgot them. instead i tried to choose, figure out which ones can at times break the tug of the sector, the gravitational pull, and which ones can really shine. because if the sector falls back into favor, i've got to be ready.
for example, ever since the market's gigantic bottom in march 2009, we've seen many sectors of retail and individual stocks within the sectors outperform. i like to listen to the earnings calls of all the retailers. but given times, i am attracted by the groups doing the best. by far, the top performers during this period have been the discount stores, particularly the dollar stores, notably dollar general, dj, and dollar tree. when i see the markets tied to money go to retail, go back to my earnings report memory and reach for these two, because i know they have the most earnings momentum. i only know that because i keep listening to the calls, even though the group may have been out of favor of late. so when everyone piles into the retail etf, which i use the rth, i am in there with the ones with the best momentum. similarly, i'm with bed, bath & beyond. when they grab a sector, they have the most inexpensive earnings momentum. there is another strategy for
more sophisticated investors i want to let you in on too. when i let you know which are the best of the best on earnings because i focused on the calls and a huge amount of money was poured into a given sector, i might to hedge my bets sell the etf and buy the best performers in the etf according to my earnings per share work. that way if the move takes a turn for the worse, we get a large macro number that hurts our market, the government numbers, or a weakness out of europe, i can lose less because i own the best and i am short the rest. sector now that is particularly important is technology. because people confuse this gigantic group of stocks which comprises more than 15% of the s&p 500 constantly. tech is an an agglomeration of a whole group of semiconductor, personal computers, cell phones tech, telecommunications tech, infrastructure stocks, assemblers. each has a separate growth rate, and here i like to look at the earnings per share growth rates of the companies i follow versus the individual slices of the
sectors because the sector rate doesn't work, even though people keep trying to use it. cloud stocks, for example, are highly valued, meaning the price earnings to growth rates are extreme. that means there is no room for error, meaning something is wrong, some chink that could upset the growth rate. in 2011 one of my favorites, salesforce.com reported a magnificent quarter. but guidance for its buildings was later than expected. the stock immediately got pancaked and stayed ugly for a long time. why? because it underperformed its portion of the technology sector, even as its growth rate would have been outstanding for say a personal computer-related stock or a disk drive, a semiconductor, or a cell phone company. these days knowing the sector isn't enough. you need to know the subsector. you need to know how your company stacks up against the growth rate of that subsector, and you need to have a good handle on whether that larger sector is in favor, or if it isn't. the bottom line, nothing is worse than owning a bad stock as defined by weak earnings and a bad sector neighborhood. nothing is better than earning a good stock in a great
neighborhood. but if you do not measure the stock's earnings against the sector's growth and you do not determine first whether the sector is in favor versus out of favor, then the earnings report, better than expected or not, it won't mean a thing. when we return, i'm going to give you seven several more ways to use these earning reports in the context of stock picking, not just trading, which i have come to see as pretty much of a zero sum game. [ booing ] stay with cramer. boo-yah, skee-daddy! >> let me tell you how i see it. >> hey cramer, where is the bull market today? >> hey, look at jim cramer. >> hey cramer, boo-yah. >> hey cramer, boo-yah! >> see the world through the eyes of jim cramer. "mad money," week nights only on cnbc. >> there is nothing like it.
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tonight we're talking not about who just reported better than expected quarter -- getting all excited about that. something we caught up in during every earning season. but how do use these reports to put together the ideal portfolio for the long term, not for tomorrow's trade. we've established the importance of those reports from what they tell us about the growth of a stock and where it fits inside a sector, as well as the sector's gravitational pull that can overwhelm even the best earnings reports.
hey, best house, bad neighborhood, neighborhood wins. but now we got to dig further than the headlines to discern what else on the conference call or in reaction to the call that can help us make some money. we don't stop with just a call. what else is important? the wall street analysts will tell you that the important concept, the most important predictor for future earnings is the gross margin. what's left after the cost of sales are subtracted. i like to explain gross margins in a simple way in a way that any kid can understand, the lemonade stand. the cost of goods sold there, it's pretty simple to understand, the lemons, and yeah, yeah, some sugar. you figure out how much those cost ya, subtract from what you charge, you've got the gross margin. of course, there are plenty of other issues that go into it. we can't have loss over the cost of the table, the time it takes to make up the sign, the number of people who sat behind the stand, if you paid someone besides yourself. the same thing goes for publicly traded businesses. we try to figure out the cost of the goods, whether they are going up or down. that's the inflation/deflation unit. how much the labor cost, very important in a rising salary
environment. how much leverage there is, meaning if you have all the labor and costs accounted for, how much business can you do? the one i like to think about is pretty well-known, it's chipotle. chipotle has legendarily fabulous growth margins. they have labor, food and customers. the more customers they can serve per hour, the more leverage they have. the keys to the growth ma margin are the cost of the beef, the guac, the chicken, the cost of the labor, and most importantly the number of customers they can push through in a given day. of course, there are dozens of other inputs advertised need to have as little turnover as possible, because the cost of training new employees is tremendous. it's a huge obstacle to making a lot of money. that's the same thing former ceo of costco made clear on many occasions on this show. he was legendary for paying his employees the most and treating them with the best of benefits because it's so important to keep them happy so the firm doesn't constantly have to train new people. new people who are not known to the regular customers who like
to see the same old smiling faces. new people cost too much money. same goes for chipotle. where the most talented people are quickly given promotions and the opportunity to run more stores. mcdonald's, similarly often praised for the growth margin improvements. by the way, because it has the most muscle it can get good cost goods. but because it has the innovator on a scale. it does not befuddle often lesser yielding employees. always in different ways. often the key to the gross margin is less to do with the cost structure of the company and more to do with the inventory conditions of an industry or a given company. now we're talking tech. semiconductor companies, for example, often produce flat-out, making as many chips as they can, 24/7. but at times in demand wanes and the supply chain gets glutted. the companies often have to cut price which then lowers their
gross margins and often makes their earnings too volatile to predict, and therefore to volatile to give them a high price to earnings multiple. that's when you see preannouncements is when there is too much inventory. we like companies with consistent growth. we pay higher multiples for them. we don't like the inconsistent growth that tech gives and we pay multiples for them. no one can handle the inventory glut that keeps happening once or twice a year. same for companies like steel or aluminum. at times they're producing too much. at times products from other companies, notably china cause a glut in the system. prices get slashed. i listen closely on the commodity calls to get a sense whether inventory is building anywhere in the system because if it is i can tell the gross margins are coming down and i got to get you out of the stocks quicker than i do. aluminum, steel, copper, i got to work faster. don't you believe for one minute it's just the commodity producers that are affected. i listen to every single major pharmaceutical call for you and hear about generic competition and what it means for future
earnings. a drug with drugs coming off patent and will plummet in price is one that scares me, and i tell you to get out. i think it's going to trade at a very low multiple to future earnings even if it traded as a high one in the past. until the stock discounts that, i got to keep you out of it. i steer clear of them as best i can until everybody knows about the patent cliff. and then i can go back. finally, there are gross margins of the oil service companies. these are the hardest, okay. they're difficult because you often have to figure out several numbers for the gross margins, how much it costs to drill to get it out of the ground, to ship it, to refine it. these are complicated companies. many companies in this industry have tried to break themselves up to make it easier for guys like me to figure out their gross margins, instead of having to be a blend that i unwrap. i care chiefly about finding costs and about end market prices. that's why the natural gas companies, for example, traded at discount, because the end market price of natural gas has been so low for so long and the
end market price of crude has been high for so long. that's what draws me toward an eog or continental, both with cheap refining costs for oil. and they've got expensive prices when they get it out of the ground. the bottom line, the key component after figuring out the earnings per share trajectory and the growth related to the cohort is to figure out the future gross margins. something that is uniquely calculated only by listening to the conference calls. can't get that in the headlines ny of the press reports. if you don't know the direction the gross margins, believe me, you won't know the direction your stocks are about to take in your portfolio. it is an integral part of the homework. if you don't calculate it yourself, you got to get it from somebody. be sure to read from the analysts who do. let's go to brad in ohio, please. brad? >> caller: boo-yah from girard, ohio. >> i got to get there. i haven't been there yet. i'll get there. i promise myself. >> caller: thanks for taking my call. as an investor interested in specialty retail, i understand that the fourth quarter is
definitely the quarter with the most significant earnings. >> right. >> caller: but how should one evaluate these companies' first quarter earnings? >> you know what? i got to go back to the rules that i gave in my hedge fund. i frankly don't care about the first quarter for retail. it's only in the fourth quarter i care about. first quarter is just not meaningful enough. it doesn't move the needle. you really only have valentine's day during the quarter. i know this because my dad sells gift wrap, okay. gift wrap is one of the things where you realize what the season are and valentines doesn't move the needle like christmas. i like the holiday season, hanukkah. i say i'll make my judgments in retail on the fourth quarter. it's all that matters. i wait to hear the quarters and then i make my judgment for what the next year is going to bring. mike in illinois. mike? >> caller: cramer, this is mike in the windy city giving you a chicago bears ba-ba-ba-boo-yah. >> hey, that's a constant. bears are constant. what's up? >> caller: cramer, if i'm short of stock, how long do i have to cover that short? >> forever. forever. that's one of the great things about shorting.
stay short for as long as you want. remember, if the stock goes up, they may ask you to put more money up, though, and that's where people get squeezed. okay, you got to dig deep if you want deep profits. gross margins will guide you in figuring out the direction of a stock. and some things you'll only find on the conference calls, not the headlines. gross margins, that's on the call. stay with cramer. jim cramer, looking out for you. >> thank you, sir, for helping us average joes on the road to financial freedom. >> thanks for all you do for us small investors. >> thank you for helping all us home gamers. >> i want to say thank you for sharing your knowledge with the every man. >> i love doing it for you. any time anyone says thank you, it's great. >> anywhere, any time, any place. answering the call of cramerica, week night, 6:00 and 11:00 eastern on cnbc. imagine your teeth are giant glass sculptures covered in yellow berets. most whitening toothpastes only remove stains from the surface of your teeth,
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you're hearing tonight for the first time not how to figure out what is a better or a worse expected earnings report to do a good trade. it seems to be a dominant way of thinking. but how to put these reports to work for you. select the best stocks and prune those that need to go. i'm talking longer term perspective. we figured out how to compute the growth rate of a company and whether it's too expensive based on that growth rate. something on jim cramer at twitter i keep getting that question. it's answered. sector analysis. it's part of the earnings report. and we've learn how'd to focus
on gross margins, something that can only come out of the conference call. now we must address two more pieces of the earnings puzzle. and these are really important, dividend growth and home run potential. from pretty much the first time i first bought stocks in the late 1980s until fairly recently, dividends were an after thought. ever since i had my hedge fund. companies became enamored of buybacks as a way to return money to existing shareholders. to me it's oxymoronic. it's making it easier for them to exit. the only winners with buybacks except in extreme cases, autozone work and novellus, are the executives who get paid for hitting certain earnings-based target. they do that by shrinking the float, through buying back just enough stock to make it when the share count is divided into the earnings per share, well, it beats the compensation benchmark that they were supposed to hit. only a very handful of buybacks do what they're really supposed to do. that is make it so there are fewer shares out there,
something that can drive a stock higher if the earnings are really excellent. but the buyback that accomplishes that goal, count them on one hand. most buybacks turn out to be a huge waste of money as companies spend a huge amount of money buying their stock. they don't know anything about stocks. they only know about their own business. what should they be doing? what are the good companies doing now? they're offering more and more bountiful dividends. something that is a much better sign than management believes in the future than a buyback. buybacks are indefinite. dividends are an out loud declaration of long-term confidence. now that low rates seem to be upon us for some time, anxious to throw gasoline on the smoldering embers, dividends can provide a rate of return that the certificates of deposits you keep trying to make money with can't. stocks can go down, but they can also go higher. that's often the case with companies that continue to boost their dividends year after year.
and if you reinvest those dividends, you can augment your return to the point where you are far exceeding a return on bonds. dividends are so important they've been responsible for almost 40% of the s&p 500's return in the last ten years. they're also the main reason why the dow jones industrial average, whether it's a above average dividend yield far outperformed the s&p 500 in 2011. how about making a total 8% if you reinvested the averages dividend. and the only thing you should really be thinking about when you're talking about benchmarks is reinvested dividends, cash in your pocket, a safety net during the bad times and a trampoline in the good. what do the earnings have to do with the dividend component we so often seek on "mad money"? simple. we listen for calls that tip management's hand on the dividend to tell us there is enough excess cash available to boost that dividend. perhaps several times in a short period of time. that's what we heard from general electric in 2011. that was a signal -- well, it signaled -- it was on every conference call they mentioned it. conversely, if a company signals the desire to buy back even more stock and the buyback is
ineffective in reducing the share count, look at how many shares they had the year before, the year before, the year before, they're just seeking to contain the damage from the shares and conditions offered to management. a lot of tech companies do this. i regard it as disgraceful. no one else thinks that. i don't care. i know what i see. these days, if management doesn't indicate it might boost the dividend on the earnings call, you can count me out, unless the company has such ferocious earnings power, a la apple, that i'm willing to overlook such an indiscretion. we also need to listen for something breakout, something new on the conference call, something that the company is going to do different or announce soon that can serve as an upcoming catalyst. i always talk about catalyst on the show. you need a catalyst to buy a stock. i scrutinize calls not so much for what has happened. that doesn't interest me. but something that will happen. if i hear something that sounds like you can propel the stock in the future, i am anxious to buy it. if there is sell-off because someone is disappointed the company didn't guide high enough
to please the momentum funds in the stock, i got my opportunity. so what are the examples like for? pharmaceutical companies, they often telegraph what might be going into stage 3, okay. meaning what drugs might be in near final approval. they often tell you expanded usage on their labels for drugs. allergan has told you more about the future on its call than just about any other. and it has been a terrific buy. every time it sells off after earnings because of this upcoming catalyst, it is constantly doing that. by the way, celgene same thing. they give you a call telling what is coming up. product cycles, product initiations that could make a huge difference in future earnings. pipeline companies, key creators of dividend wealth that we talk about all the time, they tell you about upcoming expansions that could be added to earnings. the exploration production companies almost always tell you what prospects they're looking for. and when you might hear some really good news on the calls, i always file the comments away and wait for the oil futures to go down and then i start buying
the resources that's what happened last year with continental resource. we had gone out to the bakken, they were talking about how the storms had kept their drilling down, that the storms ends, nobody cared. and then the stock took off when they told you that business is big and booming. the bottom line, we look for signals about the future of these calls, particularly about upcoming catalyst that will move the stocks later on, making them solid buys on any short-term decline because it wasn't better than expected. and we try to measure confidence about cash flow that could ultimately trigger rising dividends, the best source of wealth that stock can give us. dividends pay us to wait for things to get better, and there is no better way to find out about the prospects for increased dividends and to listen in on the earnings calls. stick with cramer. let's go to kentucky! >> a hillbilly ba-ba-boo-yah. >> a hillbilly boo-yah, holy cow! >> here is a big las vegas ding ding ding ching ching ching
boo-yah. >> a big staten island new york hate al, forget about it boo-yah. >> boston. >> nashville. >> michigan. >> california. >> boo-yahs come from all across america. let cramer help you channel yours. "mad money" with jim cramer week nights. ♪ tte, north carolina, where i spent the day with geico driver casey mears. i told him the secret to saving money on car insurance. he told me the secret to his car setup. first he adjusts... first he adjusts... (sfx:engine revving drowns out gecko's dialogue) then he... then he... (sfx:loud drilling noise continues to drown out gecko's dialogue) ...and a quarter cup of pineapple juice. or was that the secret to his barbecue sauce? hey, "secret" sauce. geico®. fifteen minutes could save you fifteen percent or more on car insurance.
the long run because the subsequent reports and the conference calls, the crucial thing. here is the deal. they don't have to be shoot first, ask questions later experiences. actually, the opposite. conference calls are ask questions, ask questions, and then ask some more questions. and only then maybe take action. [ gunshot ] we're asking specifically about what the growth of the earnings per share might be and how expensive that would make the stock versus other stocks in the sector, and maybe other stocks in the market as a whole, usually regarded as being the s&p 500. we want questions answered about growth margins, allowing us to judge if earning estimates might be beaten in the future. we're looking for signs that dividends, these days the most important indicator of a company's health might be boosted. and we're looking for a catalyst that might propel a stock higher or after earnings season is over some data points something big is going the happen. that's an important time when many stocks sell off in knee-jerk fashion, simply because some stock didn't meet somebody's expectation that might not be informed anyway
there are two more items to be gleaned from the earnings reports and conference calls, and they're new ones that i had to add to the equation because of structural changes in the stock market over the last few years. the first is geopolitical risk. never cared that much about it. america was king. geopolitical risks linked exposure. okay, we're looking for linked exposure, not just to the rising price of oil that can be jostled by the middle east. that's always been an issue. but linked exposure to the sovereign debt and banking debt issues, say, of europe. plus, we need to ask yourselves about how much exposure might be given to the chinese economy. for most of 2011, it was impossible to own banks. they were linked to the troubled euro and its accoutrements. the french and spanish counterparts, well we got our heads handed to us. similarly, owning tech, when tech is often considered to be heavily dependent upon europe. as much as 20, 25% of the earnings for tech are derived
from the continent. typically it's been deadly. we know this because the businesses don't dodge it on the conference calls. that's how you learn about it, people. the analysts won't let them get away with it. all you have to do is listen to q&a. and at the end of the call, if you're in a company that has european exposure, you're going to hear one out of every two or three questions about europe. asia, one out of every two about china. that's too hard a steeplechase for people to go through. go through the previous calls of your company. if the majority of calls about europe, you know you're going to be in for a bruising about. that's what the analysts are forcing the companies to talk about. as correlated with europe as many bank and tech stocks, it's china that controls so many of the cyclicals. go listen to the earnings calls of caterpillar, joy global, cummins. check out the calls of freeport port mcmoran, peabody, or vale, rio tinto. owning these stocks is like owning a piece of the great wall of china. you don't want to be in them when the great wall is crumbling.
it's got to be such a pervasive worry that i've seen stocks like yum! and coach which has been expanding aggressively in china because of worries about a chinese slowdown. without paying attention to what the chinese are dumping on our markets is like taking your financial life into your own hands. corning, 3m, ppm also march to the beat of the asian drummer these days. you're not going to see it in the release. it's all in the pestering by the analysts. it's pretty simple. listen to the call. and don't hang up until you have heard the last questioners so you can read the transcript and tell how worried the analysts are about the markets that didn't even move the need a few years ago. this is the earning seasons that you have to weather something that i never talked about before, okay. and we got to do this before we're done for the night. one that has become obvious to anyone who watches this show regularly. i can't believe i have a to do this. i'm a fundamentalist. you have to know the chart of a
stock ahead of the quarter. so often we have chartists on our off the charts segment that trace out where a stock could break down or break out if it hits a certain level. why is so important? you have to recognize that the charters is the expectation game in pictograph form. when you hear that expectations were too high going into the quarter and that's why the stock sold off, you to recognize that the chart was the gauge of the expectation. you look at the chart. often chart rallies to a particular level in advance of the quarter, particularly to what we call a level of resistance. if the quarter isn't up to snuff, the stock can get hammered because of a chart failure. i don't want you to react to this kind of chartmanship. i want you to use it in your favor, which is why i saved this chart take for last. you know what is an ideal stock to buy? one that has rising earnings per share growth with rising gross margins, a potential for dividend increase, and some good news on the horizon that just got repulsed because it couldn't bust through resistance. that gives you the chance to get in at a terrific price, one that
you wouldn't otherwise be able to get because of the chart. why is it so important? because no journalist is ever going to attribute the decline in a stock to the chart. yet so many hedge funds are reacting entirely to that chart and taking silly action because of it. remember, i'm not a chartist, but i play like one when i have to. the bottom line, if the question and answer on the conference calls past revolves heavily around international risks or currencies or crisis risk in europe or asia or anywhere else for that matter, be prepared for a hammering the current quarter. in the stock goes down big after a quarter you think should be going up, it might very well be the chart talking and getting you a chance to get in cheaper than you might otherwise ever have the chance to do. now you're ready for the rest of earnings season. go get them and tell them cramer sent you. dean in california, dean? >> caller: hey, jim. how are you? hello from beautiful marin county. >> man, is it gorgeous out there. how can i help? >> caller: well, listen, i check my stocks at the end of the day, and usually you'll see a little
blurb on the news headlines that says, for instance a particular stock has a close or a bye imbalance at the end of the day. >> right. >> in the shares. what i want to know is what exactly do these close and buy balances mean? do they have any implications? >> no i don't think you have to worry about it. a lot of the buying may be etf-related and on closed program. it's confusing to people. we care about the fundamentals, all right. maybe it affects the chart, maybe it doesn't. i don't care about the chart that much, but i know many people do. we care about the fundamental stock that would matter only if you're a big broker working 100,000 share orders trying to get people the best price at the end of the day. all right, it's all in the conference calls, everybody. a company's earnings release is much more than that. i need clues, clues that will signal where a company is going, and i like to look at the charts. and, well, call me. call cramer. "mad money" is back after the break. constantly taking the pulse
of the market. you need someone who has the street credit, the track record, and the market intuition to be your guy, however the market moves. let jim cramer be your man on the street. on my journey across america, i found new ways to tell people about saving money. this is bobby. say hello bobby. hello bobby. do you know you could save hundreds on car insurance over the phone, online or at your local geico office? tell us bobby, what would you do with all those savings? hire a better ventriloquist. your lips are moving. geico®. fifteen minutes could save you fifteen percent or more on car insurance.
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@jimcramer on twitter. hello, jim, you often encourage home gamers to do their homework. although i dvr every episode of "mad money," i don't recall you specifying exactly what you suggest should be involved in doing our homework. my version is mostly listening to every word on "mad money" and checking price movements in charts. what else do you suggest we do? first of all, here is what we do with "mad money." i wrote a whole book with "mad money." that's the starter. you hear a stock you like, you decide you want to get to know it. you go to the website. the websites these days have almost everything. you read about the last few quarters. i like to read the annual report and then call what the analysts are saying. i like to see what could be in the pipe. i like to see how the dividend. these are all part of the process, long before i would ever think of pulling the trigger. and by the way, i also like to think what would make me sell it. if they miss certain things or
did certain things and it's not going up so high. a lot of things for homework. it all starts with the website. here is one from trace. no doubt the -- well, the fantastic country singer. hi, jim. as we all know, the department of defense is planning to downsize the military over the next few years as we also conclude our business in afghanistan. do you believe that the large amount of military personnel, dod contractors and other support personnel will flood the market and increase the demand for goods? no, trace. i don't think it will move the needle. the army, they don't move that fast. if anything there could be a peace dividend where we could cut the budget deficit a la the '90s, i don't think you should look at this issue in a way to be able to make money after it, though. it's really not a needle-mover. as a matter of fact, kit be negative for a lot of the defense companies, as we know, and they've been under a cloud because of these cuts. here is one from danny in new york. hi, jim. i have heard you say when considering playing the downside of an equity that you would short the stock rather than buying a put. please elaborate your favoring on this. danny, i'm so glad you sent me this. if i created any misperception that i favor shorting stocks is completely out of character with all my books and what i used to
do at my hedge fund or when i was working at goldman sachs or trading for myself. i always do puts. i very rarely do shorts. as i write in "confessions a of a street addict" i was a victim of horrible shorts that lost me a ton of money. use puts. here is from b. kelly. cover calls allow me to print money out of large possessions without having to sell. why do you hate them so much? here is the answer. i got to tell you something, i hate trapping my upside. i hate cutting off my upside. you can't make more money than when you write the call. not only that, let's say something goes wrong. you sell the stock, you're really vulnerable to a takeover then because you're still short the call. never, ever, ever cap your upside. that's always been my rule. i would never sell a put. that i think, and i've seen it in '87. i saw that put people out of business.
i saw it again in 2009. put people out of business. trust me on this. i have been around for just more than three decades. trust me on this. okay, here is one from jeff. boo-yah, jim. what is your strategy in looking at hospital stocks in general? how do you approach stocks like these at earnings season? jeff, all i care is about government pay. if the government is not in the mood to be able to pay hospitals, if they're stingy towards hospitals, i don't want to touch them because there is not enough hospital mergers that can still be done without the government stepping in and saying you know what? we got to block that. with hospitals, if the government is on your side, i could be a buyer. if the government is against you, stay away. but stick with cramer. don't get mad, get even. more "mad money." catch cramer at 6:00 and 11:00 c.nb c follow the wings.
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